In this article, we will explore exactly what dead stock is and its common causes. We will also share our 10 step process to avoid deadstock inventory. Read on to learn more.
What is Dead Stock?
The meaning of deadstock is unsold or obsolete inventory that results from changing consumer demand, technological advancements, or overestimating sales. It ties up resources and space which requires management to maintain profitability.
Example: The clothing store had a surplus of last year's winter coats in the summer making them dead stock as customers were not interested in buying them. The company had to discount them heavily to clear the inventory.
Causes of Dead Stock
Deadstock can occur for a number of reasons, some of the most common reasons include:
1. Changes in Demand:
A shift in consumer preferences or market trends can quickly render certain products obsolete. If a company doesn't adjust its inventory to match these changes, it can end up with dead stock.
Ordering or producing more inventory than can be reasonably sold in a given timeframe can lead to dead stock. This often happens when businesses try to take advantage of bulk discounts or overestimate future demand.
3. Seasonal or Trendy Products:
Products tied to specific seasons or trends may become obsolete once the season passes or the trend fades. Retailers need to carefully manage inventory turnover for such items.
4. Poor Forecasting:
Inaccurate demand forecasting can result in either overstocking or understocking. If a business consistently underestimates demand, they may run out of popular items while overestimating demand leads to dead stock.
5. Product Changes:
When a manufacturer updates a product or packaging, the older versions can become obsolete. This can happen in industries such as technology or fashion.
6. Expiry or Shelf Life:
Perishable goods, pharmaceuticals, and certain other products have limited shelf lives. If they are not sold before their expiration date, they become dead stock.
7. Damage or Defects:
Products that become damaged in storage or during transportation may become unsellable. If not identified and removed from inventory promptly, they can turn into dead stock.
Impacts on Business
Deadstock inventory can have a number of negative impacts on a business. Here are some of the most common impacts:
1. Financial Loss:
Deadstock ties up capital that could be used for other productive purposes. The money invested in dead stock could have been used for purchasing more popular and in-demand products, investing in growth, or paying down debt. This can lead to reduced profitability and financial strain.
2. Storage Costs:
Keeping dead stock in a warehouse incurs ongoing storage costs, including rent, utilities, insurance, and labor for handling and managing the inventory. These expenses can eat into a company's profits.
3. Opportunity Cost:
The space occupied by dead stock could be used to store more relevant and profitable items. The opportunity cost of using valuable storage space for obsolete inventory can be significant.
4. Reduced Cash Flow:
Deadstock reduces a company's ability to generate cash flow as it cannot be converted into revenue. This can limit a business's flexibility to meet its financial obligations and invest in growth.
5. Impaired Liquidity:
Having a significant amount of capital tied up in dead stock can limit a business's ability to respond to unforeseen financial challenges or take advantage of new opportunities.
Formula to Calculate Dead Stock Cost
To calculate the cost of dead stock, you can use the following formula:
Purchase Cost: This is the initial cost incurred to acquire the dead stock items, including the cost of purchasing the products from suppliers, shipping fees and any associated taxes or tariffs paid.
Carrying Costs: These are the ongoing expenses of holding dead stock which include warehousing costs (rent, utilities, insurance, maintenance), interest costs on financing used for the inventory, labor costs for handling and managing the inventory and any security and inventory control expenses.
Opportunity Cost: This represents the potential return on investment (ROI) that is forgone due to holding dead stock. Calculate this by assessing what you could have done with the capital tied up in dead stock such as investing in more profitable ventures.
Discounting Costs: If you plan to offer discounts or promotions to sell the dead stock, estimate the potential reduction in selling price and the impact on profit margins. Include this cost in your calculation.
Disposal Costs: If you anticipate that some dead stock cannot be sold and must be disposed of, calculate the expected disposal costs. This may include fees for recycling, responsible disposal, or hazardous waste removal.
Example: Suppose a small retail business has purchased a batch of electronic gadgets that have become obsolete and unsellable. Here’s how they calculated the cost of dead stock:
Purchase Cost = $10,000
Total Carrying Costs = $47,950
Opportunity Cost: $1,000
Discounting Costs: $100
Disposal Costs = $500
Let’s calculate the dead stock cost using the formula:
In this example, the total cost of the dead stock is $59,550.
10 Step Process to Avoid Dead Stock
Use our 10 step process to avoid deadstock inventory and effectively manage it. Simply follow the steps below:
Step 1. Demand Forecasting and Market Research
Conduct thorough market research and demand forecasting to understand consumer preferences and industry trends. This allows you to make informed decisions about which products to stock and in what quantities.
Example: Before the holiday season, a toy store analyzes past sales data and market trends to predict that remote-controlled drones will be in high demand. They order 1,000 drones to ensure they meet customer expectations and avoid overstocking less popular items.
Step 2. Regular Inventory Audits and Monitoring
Implement a routine inventory audit system to continually assess the state of your inventory. Regular monitoring helps identify slow-moving items before they become dead stock.
Example: A computer retailer conducts monthly audits and discovers that a specific laptop model has been on the shelf for six months without significant sales. They take action to promote the product or consider discontinuing it to prevent it from becoming dead stock.
Step 3. Agile Ordering and Inventory Management
Adopt a just-in-time inventory management approach to minimize the risk of overstocking. Order products based on real-time demand to reduce the chances of ending up with excess inventory.
Example: A bakery uses a real-time ordering system for ingredients. They automatically reorder flour and sugar when the inventory level drops below a certain threshold to ensure they have what they need without overstocking.
4. Seasonal and Trend Analysis
Analyze historical sales data and industry trends to identify seasonal patterns and emerging trends. Adjust your inventory accordingly to avoid overstocking or understocking.
Example: A fashion retailer reviews past summer sales and trend reports, realizing that floral-print dresses consistently sell well in June. They order extra inventory in anticipation of increased demand during the summer season.
Step 5. Supplier Collaboration and Communication
Maintain open communication with suppliers to stay informed about product availability, lead times, and potential discontinuations. Collaborate to adjust orders and prevent surprises.
Example: A smartphone manufacturer regularly communicates with their chip supplier to understand production schedules. When the supplier encounters delays, the manufacturer adjusts its production plans to avoid accumulating excess inventory.
Step 6. Implement Sales and Promotions
If you anticipate certain products becoming slow-moving, plan targeted sales, promotions, or bundles to move them off the shelves and stimulate demand.
Example: An electronics retailer bundles a less popular gaming console with popular games and accessories at a discounted price to boost sales of both the slow-moving console and the related items.
Step 7. Inventory Segmentation and ABC Analysis
Categorize your inventory into different segments based on sales velocity. Use ABC analysis to prioritize items: "A" items are high-demand, "B" items are moderate, and "C" items are slow-moving. Allocate resources accordingly.
Example: A hardware store uses ABC analysis and realizes that power tools (A-items) consistently sell well, while specialty gardening tools (C-items) have slow turnover. They allocate more shelf space and resources to the A-items.
Step 8. Clear Return and Disposal Policies
Establish clear return and disposal policies for unsellable or returned items. Efficiently handle returns to minimize the impact on inventory and decide on responsible disposal methods for truly dead stock.
Example: An online retailer accepts returns within 30 days of purchase but promptly assesses returned items' condition. If a product is damaged or can't be resold as new, they have a policy for recycling or disposing of it responsibly.
Step 9. Inventory Analytics and Software
Utilize inventory management software and analytics tools to track sales, assess inventory turnover rates, and identify potential dead stock. Leverage data-driven insights to optimize inventory levels.
Example: An automotive parts supplier uses inventory management software to analyze sales data. The software alerts them when specific parts start to show slower turnover, prompting proactive action to prevent dead stock.
Step 10. Staff Training and Awareness
Train your staff on inventory management best practices and encourage them to report slow-moving items or changes in customer preferences. Staff awareness can help identify issues early.
Example: A grocery store provides training to its employees on tracking perishable items' expiration dates. Staff members are vigilant in rotating stock and promptly removing items close to expiry which reduces dead stock of perishables.
TechNex Electronics is an electronics retailer specializing in consumer electronics that aims to optimize its inventory management to avoid dead stock. Here’s how they implemented our simple 10 step process:
Step 1. Demand Forecasting and Market Research:
TechNex Electronics conducts thorough market research and predicts that wireless earbuds will be in high demand during the holiday season. They order 2,000 units to ensure they meet customer expectations and avoid overstocking less popular items like older-generation smartphones.
Step 2. Regular Inventory Audits and Monitoring:
TechNex Electronics implements a monthly inventory audit system and discovers that a specific tablet model has been on the shelf for six months with limited sales. They take action to promote the product and offer special discounts to prevent it from becoming dead stock.
Step 3. Agile Ordering and Inventory Management:
TechNex Electronics adopts a just-in-time inventory management approach for accessories like phone cases. They automatically reorder cases when inventory levels drop below a certain threshold to reduce the chances of overstocking.
Step 4. Seasonal and Trend Analysis:
By analyzing past sales data, TechNex Electronics identifies a trend: gaming consoles tend to sell well during the holiday season. They adjust their inventory accordingly and order extra consoles in anticipation of increased demand.
Step 5. Supplier Collaboration and Communication:
TechNex Electronics maintains open communication with its smartphone supplier and learns about a potential delay in the release of a new model. They adjust their inventory plans to avoid accumulating excess inventory of the older model.
Step 6. Implement Sales and Promotions:
TechNex Electronics plans a promotion where customers who purchase a laptop also receive a discounted wireless mouse. This encourages customers to buy both items to reduce the chances of the mouse becoming dead stock.
Step 7. Inventory Segmentation and ABC Analysis:
TechNex Electronics categorizes its inventory into A, B, and C segments. They prioritize items with high sales velocity (A-items), dedicating more resources to stocking and promoting them while carefully managing slow-moving C-items.
Step 8. Clear Return and Disposal Policies:
TechNex Electronics has a clear return policy allowing returns within 30 days of purchase. However, they also have a process for assessing returned items and, if necessary, recycling or disposing of them responsibly.
Step 9. Inventory Analytics and Software:
TechNex Electronics uses inventory management software to track sales and assess inventory turnover rates. The software alerts them when specific products start showing slower turnover which prompt proactive action.
Step 10. Staff Training and Awareness:
TechNex Electronics trains its staff on inventory management best practices and encourages them to report slow-moving items or changes in customer preferences. Staff awareness helps identify issues early and prevent dead stock.
We hope that you now have a better understanding of what dead stock is and how to implement our process to avoid deadstock inventory.